DOUG KASS: OK. Welcome, all, to our first Culture Sunday of the year. It's my privilege to introduce arguably one of the leading investors in modern investment history. It's my privilege to introduce my friend Lee Cooperman.
As I will explain, Lee is the gift that keeps on giving. He is the son of Martha and Harry who emigrated from Poland. His dad was an apprentice plumber in the South Bronx where Lee attended Boris High School. During his sophomore year at Hunter College, he met Toby Alowitz, another Bronx product, in French class. And the next semester, she invited him to the junior prom.
Lee is a value investor. At that time, Lee related, quote, "It was a good deal all around. She helped me with my French and we got free tickets to the prom because she was the class president."
Right after they graduated in 1964, they were married at the Park Terrace under the L on Jerome Avenue in the Bronx. And some of us think that marrying Toby is one of Lee's most envious accomplishments.
On the face of it, Lee Cooperman's credentials are remarkably impressive. Lee graduates with an MBA from Columbia Business School, works his butt off at Goldman Sachs to become Head of Research, Head Strategist, Head of Goldman Sachs Asset Management, a general partner, and the leading investment strategist in the world as measured by Institutional Investor magazine for one complete decade. He goes on to found Omega Advisors, which ultimately manages in excess of $12 billion, and is among the best performers in the hedge fund industry in the world, over more than 21 years.
But here's where Lee's credentials really should impress. Winston Churchill famously said, "We make a living by what we get, but we make a life by what we give." Lee's niche in the constellation of the wealthy falls on the sunny side of the decimal point, as in the top 0.00001%, or even further to the right.
But his lifestyle suggests more comfort than consumption, someone who is down to Earth. Let me give you an example. Some of you might recall that he spoke about four years ago here and he attended a number of Culture Sundays subsequently.
When he sat down in the office during the political debate, there was an awful smell of gasoline. It turns out that Lee, in order to save money, went to Costco to pump gas himself into his car on the way to High Ridge. The problem was the nozzle was broken and gas sprayed on his pants. That's Lee.
Lee has signed Warren Buffett's Giving Pledge, Mike Levin's Jewish Future Pledge. In fact, over the last 15 years, Lee and Toby have become the most charitable people in America. His financial contributions to the Jewish community, to education, to hospitals are immense.
Personally to me, Lee is a lot more than this. He has influenced my investment career and my life. There was good news and bad news here. The good news is that he taught me that to be a good investment manager, you have to go belly to belly with management. You have to understand the company as well as their own CFO. You have to do this by constant interaction with a company, with peers, with competitors. And there was no solid-- there was no substitute for solid, hard-hitting analysis and spreadsheets.
The bad news was that when I worked for Lee at Omega Advisors, I felt I had to arrive at the office before he did. That would be fine if my boss was normal. Lee is not. Lee would routinely be in the office between a quarter of 6:00 and 6:00 AM, which meant I had to be there between 5:00 and 5:30 AM.
So when I went on my own, I took along that lesson that Lee taught me, that to deliver better investment returns you literally extend your workday. He recognized early on that he was competing with equally intelligent hedge fund managers who had distinguished themselves professionally, went to business school. Columbia, Wharton, Stanford, Harvard. And a longer day-- a workday and a stronger work ethic would prevail.
And that helps to explain why today and over the last two decades, my workday routinely starts at 4:15 AM. And if you don't believe me, some of my friends like [? Oskovsky, ?] Loring, Henley get my 4:30 emails or text messages. I facetiously call this Lee's curse, but it's worked out fine.
One final note before Lee begins. Absent today is Lee's brother who passed away since Lee last appeared at High Ridge. He's still in my heart. Without further ado, I give you a person seasoned with a pinch of Horatio Alger, a heaping spoonful of justified self-confidence, the estimable humanitarian and my pal, Lee Cooperman.
[INAUDIBLE] for the obituary, Doug, but more than I deserved. A little hyperbole. I think you've exceeded the master in your own life, and I congratulate you on your accomplishments.
Let me just say, it's a pleasure to be here this afternoon and impart whatever wisdom I have. When Doug Kass, your chairman, extended the invitation, I asked him what was expected of me. And he said-- he suggested I focus my remarks on the investment scene and give a very precise and accurate forecast for the economy and the stock market for the year ahead.
Whenever I am asked that question, I'm reminded of a story that is a punch line that is very relevant when you listen to people like me in the forecasting game, and it's a story about a Scottish professor of medicine who while lecturing at his class at the University of Edinburgh posed the question. And the question was, what organ of the human body expands to six times its normal size under stimulation?
And rather than waiting for a volunteer, he immediately singled out Ms. McCafferty, who upon being singled out turned beet red, got very nervous, got very flustered, stood up, and said, Professor, I'm sorry, but I cannot answer that question. The professor then turned to a Mr. McDougall who upon being called stood up and said, it's the pupil of the human eye.
And the professor acknowledged the correctness of the response and went back to Ms. McCafferty and said, I have three things to say to you. Number 1, you did not do your homework. Number 2, you have a dirty mind. And number 3, you're doomed to a life of unfulfilled expectations.
So in that similar vein, if you think I know what's going on, you're probably going to have some unfulfilled expectations, but I work very cheaply. I last appeared on this platform November 18 of 2018. The S&P was 2,736. It's currently 3,999, so it was up 46%. The 10-year government bond was 2.9%. Currently about 3.5%. And Bitcoin was selling for $3,100, currently around $1,600. And 90-day Treasury bills were 2.35%, currently 4.5%.
I described myself. They didn't actually tell me how to move these slides ahead, but I assume I've got to press an arrow here. What the hell? No. Yeah, OK.
So I used this exact slide when I spoke in 2018, and I described myself as a fully invested bear. And the reason I was fully invested, I said, the conditions for a bear market were simply not present. Bear markets don't materialize out of immaculate conception. Bear markets come about for certain fundamental reasons, most notably accelerating and problematic inflation. Again, this is 2018. You didn't have that then. You have it now. It's coming the other way, but you had it about a year ago.
Secondly-- I can't see the slides from here-- you had a hostile Fed. We didn't in 2018. And we had a fed that wanted more inflation, not less. We had-- you normally see an oncoming recession. You have one coming now. You didn't in 2018. And you did have certain signs of investor exuberance, which have been cured.
And then finally, I said you'll have to worry about the geopolitical front, but you can't forecast that. And I don't run my money worrying about that, but you had the Ukraine war. So all the conditions that normally were associated with a bear market turned out to materialize several years later, and the market actually has been through a bear market. We're down about 20% from the peak.
I want to make a very important point. Inflation is a positive for common stocks. The reason inflation's a positive for common stocks is because inflation in a company's cost works its way into selling prices, which lifts the nominal level of revenues and earnings.
Inflation becomes a problem for the market when the central bank is moving to curb inflation because investors understand curbing inflation is tantamount to curbing growth. And that's exactly where we are now. The Fed has gone from wanting more inflation to wanting less inflation and fighting inflation, and investors understand that.
So currently, I would say I'm bearish on the S&P 500, but I'm bullish in what I own. And I'm about 85% net long, which is less than I was back in 2018 and probably a little bit more than I want to be. But everyone on my team loves what they own, and I'm a sucker. I go along with my team.
Why do I consider myself not so bearish? Number 1, most stocks have experienced a bear market. If you look at the history of bear markets, bear markets are a period of time where more stocks are declining than rising with decline averages about 25% and goes on for about a year.
The S&P-- the Russell 2000 Index peaked on November 1 of 2021 at 2,458. And Friday, it closed at 1,887. So the index is down about 23%, which qualifies for a typical bear market, and has been declining for about 14 months.
And so the first thing I say is most stocks, it's a very bifurcated market, very strange market. And I'll explain that in more detail in a few slides. But I think the bulk of the market has been through a bear market. And I'm finding plenty of value in the market, and I hope I'm not going to get trapped at the wrong time.
Second observation I make is most everyone I talk to is bearish. The leading contrarian in the world is Doug Kass. You know, I'm not so much of a contrarian, but I have to acknowledge that most people are bearish at the present time, which-- and they were looking for decline in the first part of the year. And so far, the market's up about 4% or 5%, right?
So the market does what it has to do to embarrass the largest group of investors, and most people are bearish. I don't think I add a lot of value by being an aggressive bear. And I call myself now-- I'm not a bull. I'm not a bear. Maybe I'm a Buffalo.
Contrary to current bullishness on bonds, I think most stocks are more attractive than bonds, and I'm having difficulty understanding why people are bullish on rates when the 10-year government is 3.5%. I think that that makes no sense.
And really, ever since the great financial crisis we have seen a situation that's highly unusual. Prior to 2008, the 10-year US government bond used to yield in line with nominal GDP. Nominal GDP is a summation of real growth and inflation. So now we have real growth on a 1%, 2%. We have inflation. The optimistic side would be 4%.
So you have nominal GDP growing 6%, 7%. It's actually growing more than that in the last 12 months because of inflation. And you have the 10-year government at 3.5%, so I don't understand the bullishness. I find many, many stocks are more attractive than bonds, and I'm having difficulty understanding why bonds yield what they yield.
I think we've had monetary policy practiced by academicians around the world, creating a situation where it made no sense. I mean, imagine a year and a half ago lending money to Germany for 10 years at a negative return. You got back less money than you lent them 10 years later. There was a degree of pessimism that made no sense, and it was really the result of the central banks around the world holding interest rates artificially low.
I would say the other parts-- let me see here. The other part of the positive element of the outlook is most bear markets and recessions have been caused by high and rising real interest rates. Adjusted for inflation, interest rates are still negative. And I don't think nobody wants-- Powell, myself, nobody knows how high rates have to go to stem economic growth.
But when based upon history, we still have negative interest rates. And most bear markets and recessions have caused by high and rising real interest rates.
That's the real Fed funds rate, and this is the real 10-year rate. As you see, we still have a negative number. And all those shaded areas are bear markets and recessions. And the message is very clear. You had a rising and positive real interest rates at the time, and that is not the case presently.
So I think interest rates based upon history have a long way to go. And when the Fed says higher for longer, I don't consider interest rates high right now. I think they're still low. They're only high because of where we were in the last five or 10 years. But relative to history, interest rates are not high at the present time. And that's the view I have, which is a minority view, I think.
And here is an interesting chart. Basically, it shows you that historically, the S&P 500 PE is averaged around 15 times. Currently around 20 times. That would make it look expensive. But then look at the right-hand side of the chart. When the PE ratio in the S&P averaged 15 times, the 10-year government averaged 620. Currently 350 on Friday's close. And Fed funds averaged 5% currently somewhere between 4.25% and 4.5%. So the change in interest rates more than justify the higher PE at the present time.
Other things. I went back. You know, I have some advantages because I've been around for a while. I've been doing this for close to 60 years. I went back the Nifty 50 period of 1972.
At that time, the world was ruled by US Trust and JP Morgan. And their philosophy was only world-class growth companies, and they didn't care what they paid as long as they were world-class growth companies. So they paid 65 times earnings for Avon. And I don't have to read the numbers to you. I think they're all visible to you.
And at that time, the 10-year government was 6.5% and T-bills were 460. So against current interest rates, I don't find stocks at any real legitimate companies with earnings expensive. The issue is, are bonds properly priced? I don't think so, but we'll get to that a little bit later.
I then also went and I looked at the 2000 bubble, and these were the multiples back in 2000. And again, there's nothing like we're seeing today. I mean, a company of the quality of Google with a fortress balance sheet is somewhere between 16 and 17 times earnings. Microsoft I think is in the mid 20s multiple of earnings. Again, much different than what you saw back in 2000.
And so I'm finding it very difficult to find stocks that are overvalued against interest rates. The ones that are overvalued are the ones that are down 80% and still don't have any earnings. But we'll talk about that a little bit later on.
What I've said on TV basically is I feel a little bit like the pharaoh. And my friend Joseph here gave me a lesson in the Bible. The pharaoh had a dream, and the dream was interpreted by Joseph. And the dream was we were going to have seven lean years following seven fat years.
And that's exactly how I feel at the present time. I think we're in store for a very, very low return in the major averages. Very low return in the major averages. And I'm cocking back to the beginning of my career.
I don't want to give you my sob story, but I got my MBA from Columbia Business School. Prior to that, it was all public school. I went to public school in the Bronx, PS 75. Went to high school in the Bronx, and I went to college in the Bronx, Hunter College, which is now called Lehman College. And then I had a short stint at Columbia Business School where I got my MBA. I got my MBA on January 31 of 1967.
I had a six-month-old child who's now approaching 56. Had no money in the bank. Had a student loan to repay. Back then, they were not forgiving student loans. And I couldn't afford a vacation, so I went to work at Goldman the next day, February 1, '67. And if you looked at the charts, on February 1 of '67, the Dow was roughly 1,000. In 1982, it was roughly 1,000. So the market and the averages did nothing for 15 years, and I had to stock pick myself to success.
And that's kind of the view I have presently, and that I don't think the market is going to be anywhere near a bull market. I think 4,800 high in the S&P will be the high for a number of years. And I think it's incumbent upon me to tell you why I feel that way.
So number 1, I think we have borrowed from the future because of excessively stimulative policies, both monetary and fiscal. The debt run up in the country is very troublesome to me. You know the numbers. OK.
This by the way shows you when you buy into the market at a high multiple-- and that's about where we are now-- the one-year, three-year, and five-year returns have been very nominal historically. Anybody who wants these slides, by the way, you're welcome to them, and I think Doug can provide them to you.
Slides 8, 9, 10, 11, whatever, they all tell the same story. There's been explosion of debt in the system and we have borrowed from the future. So I'll give you a perfect real-life example.
A friend of mine bought a house in Seven Bridges down here. He paid a million dollars for the house three years ago. The house was worth $2 million. The house was financed with 3% 30-year mortgage. He can't afford to move because the mortgage today is 7%. That 3% mortgage is a real asset. And so he's going to stay put, and housing turnover's going to be diminished because of artificially low interest rates for a prolonged period of time. But all these charts say the same thing, debt, and that concerns me.
Secondly, I say that on the debt side, in 1776 after the Revolutionary War, we had a decent amount of debt in the country to finance the Revolutionary War. Andrew Hamilton very intelligently paid that off. So we had no national debt in 1800.
And the year 2020-- 2017, excuse me-- in 2017 we had $20 trillion of national debt. And five years later, we have $32 trillion in national debt. That's a growth rate in debt far in excess of the growth rate of the economy. And assuming we don't turn to a fiat currency, that's got to be serviced. So much more of the budget is nondiscretionary. And it's going to have to be financed, and it's going to be financed by people like you and me through higher taxes and other things like that.
So I think for the second reason I'm conservative is I think for the next 12 months, we're facing continued high inflation. I think we're lucky to get inflation down to 4%. You know, which I think is a little bit less optimistic than some. I'm not selling anything. I'm just telling you what I feel. I'm retired. I'm not looking for clients or anything like that. So I tell you what I see, what I think.
Second, I think we're going to be focused on high and possibly rising interest rates. And unless we're heading to fiat currency, higher taxes, we're going to have to deal with the budget.
Third item on my list, inflation's likely to be worse than generally expected. 64% of a typical business cost is labor and is not likely to moderate dramatically. Powell has been too accommodative and the problems are not just created by the Ukraine war.
And I think labor has the upper hand at the present time. I'm a big fan of legal immigration. Let more people into this country to stem labor costs. And we can't seem to get our act together. We have poor leadership out of Washington, and I am disturbed by our inability to work together.
Now, I know what's going to happen. Fortunately, we will get leadership one day in this country, but the leadership will come when we get into a crisis. We're not in a crisis now, and we're going to get leadership out of a crisis, but the financial markets don't discount a crisis.
I would point out-- and people will get a kick out of this-- in 1776, the population of the United States was two and a half million people. Two and a half million people. A million were women that didn't have the right to vote and 250,000 were slaves that didn't have the right to vote. So the voting population was 1,250,000. Those 1,250,000 people found Jefferson, Washington, Madison, Hamilton, et cetera. We now have 330 million people in the country. We found Biden and Trump. I don't have to say anything else.
OK, it's all-- it's a shame, OK? I'm generally of the view-- and I don't when it's going to hit. It doesn't look like it's going to hit any time soon. I think the combination of high oil prices, high inflation-- yes, it's going to moderate-- Fed policy, QT, quantitative tightening, or the price of oil will push us into a recession sometime late this year or next year.
And typically from recessions-- in recessions you drop about 35% peak to trough. And so I think, if I'm right, that we have a recession. The final bottom of the market has not yet been seen.
And the way I say it-- and I've said this on TV-- I think there's a 5% chance the market goes above 4,400 this year. I think there's a 50% chance the market spends most of its time in a low of 3,600 and a high of 4,200. The S&P is now about 4,000.
I think there's a 45% chance that we can go into the low 3,000s, and that would require a recession. If there's no recession this year, I think the stock market low is probably already in for the year.
I also am very concerned about market structure issues. I'm a big letter writer in my retirement. You don't have to worry about offending anybody. So I wrote a letter to Jay Clayton four years ago and I told him, pay attention to the structure of the market. It's been destroyed.
When I joined Goldman 50 or 60 years ago, 1967, I said, we traded stocks for $0.25 to $0.50 a share. Now commissions are near zero. So the brokers between the Volcker rule and the absence of any commission, the brokers don't have any incentive or ability to stabilize markets. The specialist system is impotent because more and more of the volume is now traded off board.
And then for some unexplained reason in 19-- I guess it was 70-- in 2007, they eliminated the uptick rule which gave rise to all these high-frequency traders. The-- ck, ck, ck-- the quants. They know everything about price. They know nothing about value. So they tend to exaggerate up moves in the market when they buy and they tend to exaggerate down moves when they sell.
And they're motivated by algorithms. And this newest algorithm is Mike Wilson, who's had a good hand last year. And when he says something, there's an algorithm that tells them to buy or sell, and that'll be his destruction.
So I also think there's a lot of complacency. I don't want to single out Cathie Wood. I'm sure-- I don't know her. I'm sure she's a bright lady. That's the Ark lady buying all these Teslas and stuff like that.
But what I would say is the market will bottom when she gets consistent redemptions, not periodic redemptions. But when she gets consistent redemptions and people have given up, that's when you know it'll bottom.
And the best evidence I can give if you're a practitioner in the market and the market is adjusted to the right set of circumstances is a company comes out with disappointing earnings. The stock opens up down and closes the day unchanged or up. You saw that in the banks on Friday. If you see a lot more of that, that would be an encouraging sign.
But for now, I'd have to say that my view of fair value is somewhere around 17 times $220 in S&P earnings. That's about 3,700 or 4,000. If we get into a recession, I think the multiple goes up to about 18 times, $180, and that's around 3,400. And that's kind of my view.
Stocks are heterogeneous, not homogeneous like bonds. And there are plenty of stocks that bottomed already. And frankly, if you buy at the bottom and you sell at the top, all of us do it as a group, the top is the bottom. The bottom is the top. You can't do it.
And so I would say that stocks are the best financial asset in the neighborhood. I just don't particularly feel excited about the neighborhood. And I find a lot of stocks that are attractively priced. Let me see here.
OK, this is the debt chart. Now, it's a little alarming. Now, this is-- I'm retired, so I'm not selling anything. But hedge funds are falling from favor, OK? And I think they fall from favor at the wrong time.
If you came to me in 2008 when I was in business and said, Lee, I want to put all my money with you, I wouldn't take it for a couple of reasons. I don't want the responsibility, number 1. Number 2 I'd say, I'm an absolute return manager. You're in store for a 10-year bull run in the economy and the stock market. You don't want to be an absolute return manager. You want to be a relative return manager.
And you would have probably had me locked up because we were just coming out of 2008. We had the most severe bear market in history, OK? And we had a trend in bull market in the economy and the market.
I think we're going back to the environment on the left where you're going to have bull and bear markets. And I think this is going to create a demand for well-run hedge funds, people like Doug Kass at Seabreeze. I have no ownership. I'm not an investor, so I'm not promoting him inappropriately. Certainly, he promoted me more than I'm promoting him. But I think hedge funds make sense because I think we're in a two-way market now, I think. And that's a very important part of my view.
Now, this shows you the bifurcation of the market. I never owned any of these things. I don't even know the names of most of these companies. These were the would-be FAANGs. And one of the reasons I don't think we're going into a bull market anytime soon is it defies common sense. You've just been through the most speculative period in our financial history. Crypto, would-be FAANGs with multibillion dollar valuations that didn't earn any money. You know, weekly, daily options. Very crazy speculation. And this does not make any sense to me to go back into a bull market.
These things are down 80%, 90%. My guess, if you know the companies, they still don't earn any money. I wouldn't buy them. And they're down 80% or 90%. Somebody lost their money, OK?
And this is my [INAUDIBLE], these things I own that I think are attractively priced, I hope. I remember a story. You know, my professor in business school was Dr. Roger Murray who was a practitioner. He told the story when I was in school in 1966 that he had a student that was very bearish, and the professor said he didn't see the bearish argument.
And he met the student walking down the street. And this was the '62 cycle. And he said to the student, I congratulate you on your prescient call. And the student said, I'm sorry, Professor. I can't accept your congratulations. I had a portfolio of special situations, meaning his stock picking was overwhelmed by the overall direction of the market. I think we'll make money. These are our names. These seem low multiple-oriented. But I find a lot of things to do.
22% of my portfolio is in energy, and I'm a little bit more nervous now than I was two years ago when I took that position because nobody liked energy two years ago. Now every schnook on TV says that he likes energy.
But my view is world travel will pick up, stimulating demand. China's coming out of lockdown. We can no longer be depleting the Strategic Petroleum Reserve. We have to replace the barrels that we took out. Russian supply is down. And we are not producing reserves in line with production, which is a long-term plus for that industry.
And I like to stay off of individual stocks, but I can't resist by saying Paramount Resources is my favorite idea. It's my biggest position. And this is a Canadian oil and gas company, growing production around 15%, stock yields 6% on a recurring dividend.
They just declared a dollar extra dividend that they think that goes ex-dividend Tuesday. It's debt-free. Management owns $2 billion of stock, which is half the company, so they're invested. He had a father that preceded him. It was how he got to $2 billion. I noticed in St. Andrew's Country, a lot of PhDs are buying homes. I say, PhD stands for Papa Has Dough, you know? So--
--he's lucky his father preceded him.
AUDIENCE: Closer, please. Closer to the microphone.
LEE COOPERMAN: Closer to the microphone. OK. They have about $5 per Paramount's share of other stocks in the energy business, which they get no credit for.
But that's all I want to say. I think the only other point I'm going to make, to not depreciate what I said, but you know, Socrates said-- he was the wisest man alive-- if I know one thing, it is that I know nothing. Rumor has it that Mr. Socrates told him he knew nothing, and that's what he said. And then 3,000 years later, Warren Buffett said, forecasts of the future tell you more about the forecast than they tell you about the future.
So I'm an absolute return manager. I'm not selling anything. But I would not be surprised if the returns in the S&P 500 were negligible for the next five years. And that's my story.Hey
And I'm happy to take any questions. Happy to respond to any questions.
DOUG KASS: We're going to do some questions. I want to mention that as testimony to the way Wall Street thinks about Lee, he has a bunch of peers here that are legends themselves, people like John Levin at Levin Capital, Morris Mark at Mark Asset Management, Harvey Eisen, and most notably, Joe Rosenberg in front who managed the Tisch family's money for a couple of years. [LAUGHS] Like, 60. 50. Anyway, Lee's going to take some questions. Yes, sir?
AUDIENCE: Lee, can you give your views on gold, short term and long term?
LEE COOPERMAN: Well, short term is acting better. And I'd say given the run up of debt in the country and in our irresponsible fiscal policy, I assume that gold plays a role in your portfolio. I owned a little bit of gold, but not enough. I own enough gold to give to my grandchildren when I-- my demise, but I'm not a gold player. I'm more of an equity type of guy.
But I think gold plays a role in the portfolio, and the more pessimism you have-- look, we're going to go through a very difficult period. It took McCarthy 15 votes to get the Speaker of the House. My guess is some of these radical Republicans are going to bring us very close to a debt default in August, and the market will be gripped by that and be very nervous about it. So I think gold plays a role. Long term, I don't know. I'm not a gold player.
AUDIENCE: What happens when we've reached the debt ceiling?
AUDIENCE: Can't hear you.
LEE COOPERMAN: I'll repeat it. What happens when we reach a debt ceiling? They'll raise it.
Yeah. I assume they'll raise it with a lot of consternation. I mean, there is a risk that the crazies could put us into default, but that's a minority bet, you know? But I think that we play out this drama every time the debt ceiling is approached. But it's in nobody's interest to put us into default, so I assume there'll be a compromise at the last minute and we'll avoid a default.
Let's face it. We live in a democracy. The government employs a lot of people. They've got to get checks to live on, and they're not going to stay-- we're not going to stop paying people money, so I assume that we'll solve it.
As Walter Wriston once said, a rolling loan gathers no loss. So I assume that we'll raise the debt ceiling after a lot of consternation and arguments. But it'll create some pressure near term.
AUDIENCE: Hello. First, thanks very much for being here. It's very interesting. I know you need the money, but still, it's very good that you're here.
LEE COOPERMAN: I can't survive on what they pay me here.
AUDIENCE: [LAUGHS] I'm sure. My question is you referred to yourself as an absolute return manager or your predilection is absolute return. Could you define absolute return?
LEE COOPERMAN: Yeah, I operate without any interest of what the S&P is doing. I want to make money. Period, paragraph. I want to make money for two reasons. Number 1, I have an ego like everybody else and I want to be right. So if I lose money, that means I was wrong. And if I'm wrong, I can't be happy with myself. That's number 1.
Number 2, [SIGH] I plan to give away all my money. And I envy people like Ken Langone, Bernie Marcus. They have a lot more to give away than I have. But you know, I've taken the Giving Pledge with Warren Buffett, and my friend Mike Levin has a Jewish Giving Pledge. I took it with him. So I'm giving away all my money. I gave my kids their inheritance five years ago, more than they needed. More than they deserved.
But I intend to give away my money, you know? And I get a lot of enjoyment out of that.
AUDIENCE: Thanks so much for speaking today. You said at least twice if we were to go to fiat currency, blah, blah, blah. Oh, sorry. Thank you. You said at least twice-- you used the expression if we go to a fiat currency. Why wouldn't you say we have a fiat currency now? We've printed $12 trillion of it in the last 10 years.
LEE COOPERMAN: Well, people are still willing to accept our monetary liabilities. When that changes-- and it could change-- then you wind up with the huge inflation rate. The money depreciates at a very rapid rate. I'm not an economist, but I would say that is a real risk.
You know, today effective January 1, Social Security benefits went up 9%, 10%. Much more of our budget is now not controllable, and we're heading down a very poor path. You know, I'll be honest with you. I'm very open. I voted for Biden because I found Trump so offensive, but he's a schmuck.
You know? He really is. Unfortunately, it was more a vote against Trump than it was a vote for Biden. For what it's worth, I don't think Biden or Trump will be the presidential candidates in 2014-- 2024. I think there'll be somebody else. I don't know who.
AUDIENCE: What about Trump?
LEE COOPERMAN: Well--
AUDIENCE: [INAUDIBLE] Republican?
LEE COOPERMAN: Excuse me?
LEE COOPERMAN: I'm a registered independent for 25 years. I became a Democrat when Mike Bloomberg declared his candidacy, and he let us down because he was not well prepared and Elizabeth Warren ate his lunch. But I switched back to independent.
You know, my son-- God bless him-- he graduated Stanford Phi Beta Kappa. He's 56 years old. He had a sign on his lawn in 2020. "They All Suck."
That's the bottom line.
AUDIENCE: Have you heard of the Jewish Future Pledge, the one that Stephen Spielberg--
LEE COOPERMAN: Well Mike Levin--
AUDIENCE: Is that the same one?
LEE COOPERMAN: That's the same one. And I've agreed to give him half my net worth and the other half I gave to Warren Buffett. What I told Buffett was-- 11 years ago when I met with him and Bill and Melinda Gates when they were still an item, we had dinner together. And I said to him, if you're speaking to wealthy people, asking for half isn't asking for enough, but nor is the request original.
I said, 1900, Andrew Carnegie said he would die-- the "rich dies disgraced." In 1930, Winston Churchill said, "You make a living by what you get. You make a life by what you give." In 1961, President Kennedy when he was inaugurated said, "Ask not what you could do for your country-- ask not--" you know what I'm saying.
AUDIENCE: What you can do-- "what your country can do for you."
LEE COOPERMAN: Yeah.
LEE COOPERMAN: And then I said in the Talmud, it says You measure a man now by what he has, but what he gives. And the difference between Warren Buffett and me is I'm not going to give my money to Bill and Melinda Gates to give away. I'm going to give my money away to those organizations and institutions that made a difference to me and my family in our lifetime.
AUDIENCE: And how do you propose to present that to children today, that they continue to--
LEE COOPERMAN: I have found over the years, if I hear your question right, that there's more organizations looking for money than you have money. I don't care what you've got. So I gave a very large gift to, say, Barnabas Medical Center, which is now called Cooperman Barnabas. They dropped a saint for a Jew. I think that's my sense of humor.
And then I sent-- my wife and I together-- it's a family effort-- we sent 1,000 kids to college in Newark. We paid their tuition. We gave a lot of money to Boca Regional down here. We gave a lot of money to the nursing home and the Jewish campus down here, which is named the Toby and Leon Cooperman senior citi-- Sinai housing.
And gave a lot of money in New Jersey Performing Arts Center. And I'd like to see my kids and grandkids grow old in health and purpose. Helping others is the most important thing to me. Yeah, ma'am.
AUDIENCE: Do you have an opinion about NFTs?
LEE COOPERMAN: Yeah, I think you have to have shit for brains to play that game.
But that comes from somebody that knows nothing about it. I think-- I said that last year. I gave a similar talk last year, and they asked me that same question at St. Andrew's, and that's exactly the same answer I gave. You have people on both sides of the equation. You've got-- Warren Buffett said, I won't pay you $0.25 for all the crypto that exists. Charlie Munger refers to as rat poisoning. And you've got other smart people that believe in it.
I don't know enough about it to have an intelligent view. I think Bitcoin-- blockchain technology is real, but I think crypto is bullshit. And nonfungible tokens, I think, in the same category. John?
AUDIENCE: Yeah, we truly congratulate you on your remarkable achievement. I heard Greenspan once ask, what's the surprise you're most interested and worried about? He said, if I knew about that, I would think about it. What is the surprise-- is there a surprise out there that creates a major bull market? You said that stocks are an inflation hedge. So is it fiat currencies? Is it something else? Is there a surprise out there like that?
LEE COOPERMAN: Well, the surprise to me would be if we got into a new bull market any time soon.
AUDIENCE: Obviously. That's why the question.
LEE COOPERMAN: Yeah. I read something over the weekend that Friday's action was called a breadth thrust, and that Marty Zweig gave you the numbers. You had a breadth thrust. The market 12 months high, it was like an average 20% higher.
The market acts very well, but I believe it's going to be capped by the fundamentals. And I say if we go above 4,400, I would be wrong. I think there's a 5% chance of that.
And the surprise would be if the Fed caves in and pivots any time soon, because I don't think that they-- I don't think they're going to pivot any time soon. I think interest rates are still too low. You're an old timer like me. These interest rates, do you feel they're high?
AUDIENCE: They're too low.
LEE COOPERMAN: Yeah, I agree. So if the Fed continues to push up interest rates, I think that'll be a restraining force in the market. And I think we have to deal with the budget deficit. The numbers are very concerning, and more and more of the budget is uncontrollable.
AUDIENCE: It's wonderful to be speaking to a legend here.
LEE COOPERMAN: Thank you for your service.
AUDIENCE: Thank you. [LAUGHS]
LEE COOPERMAN: I would have served. My older brother, who just passed away, registered as regular army. I wrote him a letter every day. RA11286471. I wrote him every day.
AUDIENCE: So anyhow, the market, the future market seems to be pricing in three rate reduction between now and January.
LEE COOPERMAN: I said I'm out of step with the market.
AUDIENCE: What do you think of that. I mean, is it--
LEE COOPERMAN: I think there's zero chance-- not zero. Nothing's zero. There's a very low probability the Fed will be cutting any time in the next 12 months. That's my view.
Now a smart guy like Gundlach says, trust the bond market. Don't look at the stock market. Trust the bond market. I just have a different view. I don't think interest rates adjusted for inflation are that daunting.
AUDIENCE: So what happens with unemployment if it goes up to 5%, for example, between now and December?
LEE COOPERMAN: 5% is not a problem for the market.
AUDIENCE: It's not?
LEE COOPERMAN: No. As I showed you on those slides, I think 6% and 7% would be an issue for the market. But I think-- look, there's a lot of confusion. I could tell you on the one hand that the best time to buy bonds is when the yield curve is inverted, inverted meaning short rates are above long rates. People instinctively don't want to buy bonds at that time. They want to stay short.
But the best time historically to buy bonds is when the yield curve is inverted. But I just can't bring myself to buy a bond at 3.5%. It makes no sense to me. I find so many things in the stock market that make more sense than 3.5% bonds.
And getting back to John's question, if we basically start cutting rates, we're institutionalizing inflation and the stock market will go up. You'll get nominal dollars. You won't be making real dollars, though.
AUDIENCE: Do you have an opinion on the value of real estate going--
LEE COOPERMAN: Everything is overvalued because of monetary policy. As interest rates go up, real estate will go down in value. But you're obviously a real estate guy, and it's location, location, location.
I have a sufficiently high net worth. I have a little of everything. So if I know the promoter and the project makes sense, I'll invest in it. But I believe everything has been elevated in valuation because of monetary policy. And I think we're in the process of values coming down, valuations coming down. We borrow from the future. Yeah?
AUDIENCE: Yeah. We talk a lot about monetary policy. We haven't said anything about fiscal policy.
DOUG KASS: Both are irresponsible.
AUDIENCE: Absolutely, but what are we going to do about fiscal policy? And what's going to cause us to really focus in on deficit reduction and cutting spending?
LEE COOPERMAN: I think we need a crisis. They say there's no cooperation. We had cooperation in 2008. The regulators invented every acronym in the country to save the country from falling into a depression. And we'll get there again.
And the problem is the stock market doesn't discount a crisis. But I wouldn't be shocked if we fell into some kind of crisis environment. We've had such irresponsible fiscal monetary policy, you know?
And I don't relish it because I'll lose money. In a bear market, he who loses least wins. So last year, I was down 3%. Guess what? I put money with five guys on the outside. They were lot younger than me. And I'm not a good short seller. And they were down an average of 30%. Four of the five went down an average of 30%. One guy was up a little bit.
And so I was down only 3%, which everybody says is a great performance. I didn't think it was so great. And this year I'm up 5% because I'm long, and market's up 5% and I'm up in line with the S&P. I need a young Doug Kass. He does work as hard as he says. He said I'm the hardest working guy on Wall Street. The truth is he works harder than me. I've gotten a little bit lazy. Any other questions?
AUDIENCE: [INAUDIBLE] said he owns all these stupid growth stocks.
LEE COOPERMAN: Which ones?
AUDIENCE: Well, like, the ones that everybody loves-- Apple, Google.
LEE COOPERMAN: I own Apple. I own Amazon a little bit. I own Google. I don't own Apple. I misspoke. I don't own Apple. I own a little bit of Google. I own Microsoft. I have a little bit of Amazon. I've written options about four months ago against every one of those positions.
It is very clear to me leadership is changing in the market, moving away from these technology companies to more value situations. But these are great companies long term, and that's my window in technology, and I hope I don't outsmart myself by optioning off my position. So I'm short Google options struck at 100 and the stock is 88 or something like that. So 15% above the market, I'm short options.
I think that the market's changing. Look, there's a fashion business, and fashions come and fashions go. The one thing that I have no interest in is these-- I can't get back to the view. These would-be FAANGs that-- I don't know how to go backwards. The would-be FAANGs are down 80%, 90%.
Personally, I'm not buying anything that doesn't pay me to wait, meaning a dividend, or does not have the ability and the willingness to buy back cheap stock. In other words, if you think own something that's undervalued, you want to see the company taking their cash flow and buying back cheap equity. So unless they're buying back stock or paying me a dividend, which is paying me to wait, I'm not buying.
AUDIENCE: So I have a question for you because there seems to be a common thread in your comments.
DOUG KASS: Right.
AUDIENCE: You view the bond market and interest rates as being too low, but they're defying gravity in that the inversion is growing. But simultaneously, you have China selling as much of our debt as they can, and we have to refinance ours at the same time. What in your mind would be the catalyst to cause the bond market to rethink their position with regard to inflation and recession if, in fact, the bond market is-- or interest rates are priced too low within the market? What do you see happening?
LEE COOPERMAN: Well, I see a couple of-- two or three months of bad inflation numbers would get people to be less optimistic. And that would feed itself right into the bond market.
I'm highly critical of Powell. Not so much that he incorrectly talked about inflation being transitory, but three years ago he was telling the public that the stock market wasn't overvalued because of what interest rates were. He never bothered telling the public that interest rates didn't belong where they were. So I'm very critical of Powell. He's a very average mind. But you know-- and so the idea of relying upon his view of the world does not leave me very optimistic. Yes, sir?
AUDIENCE: Would you buy Tesla stock today?
LEE COOPERMAN: I wouldn't, but I would not have bought it at lower prices or much higher prices. I buy things that have earnings, and he's just too unconventional for me. I'm like a suit, you know? And he's just too unconventional. He's a genius, obviously. He's a genius. He's a modern-day Michelangelo, but he's not my cup of tea. And I think he belongs in jail for the way he's manipulated his investors.
And I think-- and then this is-- don't go to the bank on this one-- I think he has huge contingent liabilities on these driverless cars because these accidents-- I'm told by people who know a lot about it that it's been misrepresented in terms of the safety of these driverless cars. But it's not my cup of tea. General Motors at six times earnings might be. I don't own it, but that might be.
LEE COOPERMAN: Depending on ETFs?
LEE COOPERMAN: Look, I think indexation ETFs play a role in one's portfolio. I'm very bottom-up oriented. I speak to every company I have in my portfolio. I call the managements. I give them a chance to lie to me. I make my own judgments. So I'm a very hands-on investor.
Like this morning, I spoke to a company. They're going to put out an announcement tomorrow. I can't trade in it. Stock will double tomorrow. We'll run the announcement. Don't ask me the name. I don't want to get involved. But basically, I'm very bottom-up. But I think ETFs and indexation play a role in the portfolio.
I'm small enough where I could find stocks that interest me that are much better than the market. And the way I look at the market, when you buy the S&P, you've got an index of 500 companies that are trading around 17, 18 times earnings, that grow maybe 6% a year, yields 1.5%, and sells a price to book at maybe two and a half times.
I try to find things that represent more values, growing more rapidly, yielding more, have a higher return on equity, selling at a lower valuation. So I've been doing this for 60 years. That's my shtick. If you're not a professional, I think indexation and ETFs make sense.
AUDIENCE: What's your opinion on Baron Funds?
LEE COOPERMAN: What funds?
AUDIENCE: Baron Funds.
LEE COOPERMAN: Ron Baron's a bright guy, but you know-- he's a bright guy. He's a hardworking guy, but I have a different style than he does. I'll leave it at that.
AUDIENCE: Well, thank you very much.
AUDIENCE: What's your opinion on how the great tax reduction that took place, the corporate tax reduction, how that impacted the economy in the near term and how it'll--
LEE COOPERMAN: What great tax reduction?
AUDIENCE: [LAUGHS] Under Trump the tax rate reduction, the corporate tax rate reduction.
LEE COOPERMAN: Look, I think all of us are going to be paying more in taxes, myself included. And I've said this 1,000 times and nobody listens, OK? What we have to agree to as a nation is, what should the maximum tax rate be on wealthy people? Because that will define the revenue yield to the government. The government's got to size themselves to that revenue yield.
Now, if you ask Bernie Sanders who's not a socialist-- he's a communist, OK? He thinks the marginal tax rate should be 90%, OK? Elizabeth Warren says 70% plus a wealth tax, and she's full of shit, OK? Paul Krugman says 64%.
The guy I love quoting is the Black conservative economist Thomas Sowell who says in this era of social justice, what is your fair share where someone else has worked for it? Well, I've said I'm willing to work six months for the government, six months to myself. 50% marginal tax rate. The trouble is if you live in New York, New Jersey, Connecticut, California, you're already well into the 50s. So we have to trim our expenditures and learn how to live within our means, which is getting more difficult every year goes by.
Biden has not found an expenditure that he's not willing to make, and I think it's a problem. That's my view. But the markets let us get away with it. When I see a guy as bright as Jeff Gundlach talking about buying 3.5% 10-year government bonds, I don't get it. I have a lot of stocks in my portfolio that are yielding 8% and 9%.
And your transfer as an example. Insiders own a terrific amount of stock. They're buying stock left and right. Yields 7%, 8%, and they benefit from a little bit lower oil prices that stimulate demand, more demand going through their pipes.
So I find a lot of things to do in the equity market, and I don't find them-- I don't like the environment for a lot of reasons. But I don't find stocks expensive as an asset class when I see interest rates where they are. I think the bubble for interest rates-- and I said that when I was here in 2018. And the 10-year government-- the stock market's up 45% and the 10-year government has gone from 290 to 350.
So probably the loss in capital has offset most of your income. I think that's the world you're looking at in fixed income. You won't make capital gains.
Just think about it this way. The only way a bond adjusts to higher inflation is to decline in price to keep the coupon current. The way companies adjust to inflation is [INAUDIBLE] raise prices to incorporate the higher cost of operation into their selling prices, which lift the nominal level of revenues and earnings.
So if we're going to accept inflation as a higher rate-- and there's talk about the Fed stopping at 3% inflation, and you're probably running 3% right now. So I think that will be positive for stocks.
AUDIENCE: Yeah, bonds really are a terrible investment because--
LEE COOPERMAN: I think I'm saying that with you. I agree.
AUDIENCE: When they go up, they call you out. And when they go down, you own it.
LEE COOPERMAN: Well, you can own non-callable bonds. I don't like perpetual--
AUDIENCE: I'm talking about corporates for the most part have call features and redemption--
LEE COOPERMAN: Well, there are a certain type of investors. Insurance companies, pension plans that need the income. I was a director of one of the great corporations in America. The greatness had nothing to do with me. Automatic Data Processing, AAA, a very well-run company.
I remember they were putting money into bonds, and I criticized that, and I spoke to the actuarials. You don't have to mark a bond to market where you have to mark your equities to market. So people are duped into doing things that don't make economic sense.
And again, that's why I say I'm an absolute return guy. I talk negatively on bonds. My biggest position is a bond, but it's off the run. I'm not going to-- it's too complicated to talk about it now, but that's a triple in the next 12 months. I think we've done it. I know the food here is excellent.